Wednesday, December 1, 2010

The Federal Reserve - Now you know where to go if you need a loan

On December 1st, the United States Federal Reserve, in the interest of transparency.  Please don't mistake this release of data as an act of largesse since the release is mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; the Fed isn't baring its soul because Mr. Bernanke and company really felt a need to come clean with the American people.  The Fed posted detailed information on its public website listing showing:

"...more than 21,000 individual credit and other transactions conducted to stabilize markets during the recent financial crisis, restore the flow of credit to American families and businesses, and support economic recovery and job creation in the aftermath of the crisis."

Lovely sentiment, especially since the Fed has to share at least some of the blame for the Great Recession.  And, we all know how well the job creation thing is going, don't we?

According to the Fed, these transactions were conducted through a variety of lending facilities to provide liquidity to financial institutions (which they pocketed, paid back, re-pocketed and repaid back and then started handing out bonuses to key employees) through the use of short-term loans.  The Fed purchased agency mortgage-backed securities (MBS), longer-term Treasury debt and Federal agency debt which supposedly supported the mortgage and housing markets, lowered long term interest rates and fostered economic growth.  When we look at the whole bail-out package, we see that the real estate market is still dropping, foreclosures are on the rise, unemployment is stuck firmly in the 9.5 to 10 percent range and the economy is growing only in the eyes of a few academics.  But yes, longer term interest rates did fall to generational lows down to the 0 to 0.25 percent range, a move that could be creating a bubble in the bond market but that's another story for another time.  All in all, I'd say that the Fed's program was a rather tepid success; but hey, at least we didn't have to face a 1930s style Depression with people lining up at soup kitchens, right?  Oh, and don't forget that they did all of this "with no loss to taxpayers" as they are kind enough to remind us!

The Federal Reserve states that it "is committed to transparency" and, as such, "has previously provided extensive aggregate information on its facilities in weekly and monthly reports.".  We won't mention that little incident back in August when the Federal Reserve (along with a banking industry trade group called the Clearing House Association) was debating whether to take a Freedom of Information case to the United States Supreme Court seeking to delay the court order which would have forced the Fed to disclose documentation about loans it made to various banks during the 2008 "credit crisis" to the sweaty masses.  Here's a quote from Bloomberg about the case:

"The Fed argued in the case, which was brought by Bloomberg LP, the parent of Bloomberg News, that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help."

Heaven help the poor banks, it would be most upsetting to all of us should America's banks "feel" a sense of discouragement.  That would never do.  On the other hand, the sense of discouragement that those who are partaking of the foreclosure process feel is quite irrelevant.

So much for the Fed's commitment to transparency.  Incidentally, the Fed, after considering the matter for two months, decided not to join the Clearing House request.  I guess sober second thought actually did sober up the Fed.

Back to today's release.  The Fed lists 21,000 transactions, as noted above, that can be downloaded as a group of Excel spreadsheets found here.  Note the release of information is divided into the various Facilities and Programs that were undertaken on YOUR behalf.

Most of the information is mind-numbingly boring and reading through it most closely resembles reading through the legalese of a Supreme Court document but here are a few of the high points:

1.) Citigroup:  This most fortunate of banks was offered support by the Department of the Treasury, the Federal Reserve and the FDIC to protect $306 billion of assets that consisted of loans and securities backed by residential and commercial real estate.  Ultimately, Citigroup turned down the kind offer and paid an exit fee to terminate the agreement, netting $50 million for the Fed.  However, Citigroup did borrow $2.2 trillion, the largest amount of all banks.

2.) Fannie Mae and Freddie Mac:  These two agencies of the Federal government benefitted to the tune of $1.25 trillion for mortgage securities in a desperate attempt to drive down mortgage rates and ease credit.  Pardon me, but wasn't it easy mortgage credit that created a significant part of the problem in the first place?

3.) Bank of America:  Like Citigroup, the Treasury, Federal Reserve and FDIC agreed to protect an asset pool of $118 billion of loans and securities backed by residential and commercial real estate loans blah, blah, blah.  Again, like Citigroup, B of A declined the more than generous offer and paid the Fed a $57 million exit fee.  However, the bank did borrow $1.1 trillion not counting the $2.1 trillion borrowed by Merrill Lynch which was later absorbed by the Bank of America.

4.) Morgan Stanley: $2 trillion.

What is rather interesting is to see how many European banks availed themselves of the Federal Reserve's more than generous offer.  Barclays, Deutsche Bank and Credit Suisse were frequently "dipping their bills" buying and selling (mostly selling) agency Mortgage Backed Securities and interestingly enough, they were still partaking right up until July 8th, 2010 (supposedly closing up their books).  In total, the Federal Reserve picked up $1.25 trillion worth of paper.  What is interesting is that the Fed used external investment managers to do the dirty work for them until March 2010 when the Fed began to use their own staff for their purchases.  One shudders to think how much was paid in commissions to the investment houses involved unless of course you happen to work there!  There is an entire alphabet of other programs that the Fed enacted to get things moving including the Term Auction Facility (TAF), Central Bank Liquidity Swap Lines and Primary Dealer Credit Facilities.  My eyes glazed over once I got through a few pages of the Fed's ample documentation so I'll leave the rest up to you.  When I look through the rest of the data, I'll post a summary.

The Federal Reserve is quite proud to announce that most of the loans have been repaid and that none are overdue.  What they fail to tell us is the repercussions to the world's financial system had the loans not been repaid.  Their attempts to restimulate the economy by providing short-term, nearly interest-free money to the banks could have backfired.  As well, their attempt to get consumers to spend more by borrowing more for auto loans and other credit could well have compounded the issue that was created by easy credit in the first place.

Here, in one sentence, is the crux of the whole issue for most of us:

"No rules about executive compensation or dividend payments were applied to borrowers using Federal Reserve facilities. Executive compensation restrictions were imposed by statute on firms receiving assistance through the U.S. Treasury's Troubled Asset Relief Program (TARP). Dividend restrictions were the province of the appropriate supervisors and were imposed by the Federal Reserve on bank holding companies in that role, but not because of borrowing through the facilities discussed here." (my bold)

This is how much help the Federal Reserve offered Wall Street: $3.3 trillion
This is how much help the Federal Reserve offered Main Street:                  

Enough said.

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